Hittite Microwave: Poised for Growth

May. 3.07 | About: Hittite Microwave (HITT)

Hittite is in a sweet spot in the semiconductor industry. The company has comfortably exceeded earnings estimates in seven straight quarters. Five analysts have raised their estimates for this year. Over the past week, this year's earnings estimates have increased six cents to $1.56 per share, while next year's numbers have risen seven cents to $1.69 per share.

Hittite Microwave (NASDAQ:HITT) designs and develops high performance integrated circuits [ICs], modules and subsystems for radio frequency [RF], microwave and millimeterwave applications. The company offers standard off-the-shelf products as well as customized products to some of its larger customers. Hittite's three largest markets are currently military, broadband, and microwave and millimeterwave, which comprised approximately two-thirds of revenue during 2006.

The company has a broad base of over 2,300 customers in a variety of markets and applications. Historically, both Motorola (MOT) and Boeing (NYSE:BA) have been large customers, accounting for greater than 10% of sales each, however with its current customer diversification no customer accounts for greater than 10% of revenue. Distributor currently account for approximately 5% of revenue, including 5.3% in the first quarter of 2007.

Demand for mobile communications services has grown rapidly and appears poised for continued growth over the foreseeable future. This growth in systems using RF, microwave and millimeterwave technologies has accelerated demand for the analog, digital and mixed-signal ICs, modules and subsystems that Hittite provides.

Hittite has generated historically high levels of profitability. Gross margins have trended upwards every year, rising from 55.4% in 2002 all the way to 70.8% for 2006 as the company has been able to improve efficiencies and lower manufacturing costs, as well as an improve its product mix. Gross margin reached the 73% for each of the first three quarters of 2006 due to product mix and operating efficiencies.

By focusing on intellectual capital, such as semiconductor modeling and library of proprietary circuit designs, rather than investing in capital-intensive wafer production facilities, Hittite has been able to generate strong returns on invested capital. Improving manufacturing efficiencies have been one of the factors contributing to strong gross margins.

On April 26th, Hittite Microwave announced results for the first quarter of 2007, ended March 31, 2007. Revenue for the quarter was $36.3 million, above the Zacks estimate of $35.5 million and the previously guided range for revenue in the $35.0 to $36.0 million range. Revenue was up 30.4% over the $27.9 million in the first quarter of 2006, and up 2.6% sequentially over the $35.4 million reported in the fourth quarter of 2006. EPS for the quarter were $0.39 on net income of $11.99 million, ahead of the Zacks estimate of $0.37 and previously issued guidance for EPS in the $0.36 to $0.38 range.

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